Nicholas Carr

Whatever the fate of
Microsoft
's bid for
Yahoo!
, the proposed acquisition tells us a lot about the changing shape of business on the Internet and how competition is likely to play out in the years ahead.

One important message is this: Software is becoming a media business. The Net is not only a universal medium, a distribution channel for words, sounds and images. It is also turning into a universal computer--the machine we use to run software and store data.

Look at how young people are using their PCs. They're not going out and buying packaged software programs and installing them on their hard drives. They're firing up their Web browsers and tapping into the software running on the Net. MySpace, Facebook, Wikipedia, Flickr, Gmail, "World of Warcraft"--they're all part of this trend. But even the mainstays of Microsoft's
lucrative Office Suite--word processing, spreadsheets, presentations, messaging--are being offered, by
Google
and others, as "Web apps."

This shift has profound implications for Microsoft.

First, it means that control of the PC operating system, the linchpin of the company's success, is far less important than it used to be.

Second, it means that software will increasingly be given away for free and, like other media, will make money through advertising. For Microsoft, Yahoo!'s
expansive Web properties and advertising system provide a readymade distribution channel and revenue generator for the software of the future.

The proposed deal also means this: Scale is everything.

The Net has long been seen as a great leveler of playing fields, a system that diminishes the advantages of size and lets individuals and small businesses compete with giants. But that's turning out to be an illusion. What we've seen recently is that success on the Web requires the aggregation of vast quantities of content and traffic, the collection of enormous stores of data about users, and the brokering and distribution of billions of ads.

When it comes to Internet scale, Microsoft finds itself in the unusual position of playing catch-up. Google not only dominates search and advertising, but it has been investing many billions of dollars in building a network of massive online data centers. Those so-called server farms provide the processing muscle for all the new Web apps--and a big competitive advantage for Google.

Windows and Office will continue to be cash cows for Microsoft for many years. But they're yesterday's products. Microsoft knows that to succeed in the future, it has to expand its online operations fast. The rich offer for Yahoo! may be risky, but at this point Microsoft has more money than time.